Royal Bank of Scotland v Hicks & Ors (2010)

Summary

The court granted a mandatory injunction requiring the re-constitution of a board of directors to a composition which preceded the execution of a special resolution by the company's controlling shareholders. The special resolution was an attempt, by those shareholders, to regain a controlling interest in the company which they had divested as part of a corporate refinancing arrangement with a creditor bank

Facts

The applicant bank (R) applied for a mandatory injunction against the respondent directors (X) of two companies (Y) to restore the composition of their respective board of directors. X cross-applied, in Part 8 proceedings, for interim relief restraining Y from proceeding with the sale of shares in Liverpool Football Club to the interested party (N). X were the owners, shareholders and directors of Y. R had provided financial facilities to X, through Y, to enable them to purchase Liverpool football club. If those facilities were not repaid by a certain date then R was entitled to place the club into administration, significantly affecting its commercial value. R and X agreed to enter into a refinancing agreement. X covenanted, inter alia, to (i) sell the club; (ii) allow the sale of the club to be negotiated by Y's board of directors, acting under a third party chairman; (iii) execute a new corporate governance structure in respect of Y, which required X to divest their controlling interest in Y. The newly constituted board entered into negotiations for the sale of the shares in the club and, as a result of extensive investigation, came to consider two rival bids: one from N and another from a different entity. The board convened on October 5, 2010 to discuss the rival bids. X refused to participate in that meeting and, instead, purported to execute a special resolution, in their capacity as 100 per cent shareholders in Y, reconstituting the board of directors. X claimed that they had been kept out of the sale negotiations and that the board were favouring N's offer, which undervalued the club. R submitted that there was no arguable answer to its claim in breach of contract against X who had, by the execution of the special resolution, breached the terms of the refinancing agreement. Y, supporting R's claim, submitted that X should not be allowed to take advantage of that breach to their benefit by frustrating the sale of the club to N. X argued that the agreements underlying the execution of the corporate governance documentation contained mutual obligations which had been breached, entitling X to treat the refinancing agreement as being repudiated.

Held

(1) In relation to R's application for mandatory relief, there was no seriously arguable defence to its claim in breach of contract. The evidence did not begin to establish a case of repudiation that would otherwise have entitled X to act as they had, Luganda v Services Hotels (1969) 2 Ch 209 CA (Civ Div) applied and American Cyanamid Co v Ethicon Ltd (No1) (1975) AC 396 HL considered. Firstly, the directors' meeting on October 5, 2010 had been convened in order to allow the directors to consider the rival bids. X were entitled to participate in that meeting but chose instead to disrupt the legality of that meeting, which led to the events they later complained of. Secondly, X would have been entitled to put the case concerning the rival bids at that meeting had they so wished. Thirdly, the true position was that X had, in executing the special resolution, purported to regain the controlling interest in Y which they had divested as part of its refinancing agreement with R. They had done so in order to veto N's bid, which they thought was unfavourable to them. R was entitled to the mandatory relief sought. (2) In relation to X's cross-application for interim relief, the further conduct of the sale proceedings was a matter for Y's board of directors as now properly constituted. There was no justification for any further interference by the courts in Y's affairs. If interim relief was granted the club's financial future would continue to be uncertain, causing R and the club significant damage; damage that would be enormously difficult to quantify and which X might not be able to make good.